Clearer Standard for Business/Asset Acquisitions

On January 5, 2017, the FASB issued Accounting Standards Update (ASU) 2017-01 to clarify the definition of a business.

Determining whether the net assets being acquired constitute a business under Accounting Standards Codification (ASC) 805 is critical. The accounting for a business combination is significantly different than an asset acquisition. In an asset acquisition transaction costs, which are often significant, are capitalized but would be expensed under ASC 805, business combination, accounting. Other costs such as in-process research and development (IPR&D) and contingent consideration are recorded on the balance sheet in a business combination but expensed or recognized when the contingency is resolved in an asset acquisition.

The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include inputs, at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606.

We expect this to impact many of our clients in the real estate industry. For example: Company A purchases a portfolio of three multi-family apartment complexes that each has in-place leases. Company A assumes the existing outsourced landscaping and security contracts for the properties. No other elements (e.g., employees, assets, substantive processes) are included in the acquired assets. Company A determines substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. As a result, Company A concludes that the acquired assets are not a business and does not account for the acquisition under ASC 805.

This becomes more complicated when the acquisition includes and operating company and the employees, all the contracts, operating IT and processes are being acquired. If the example above was for three skilled nursing facilities and all of the contract, IT, employees and processes were being acquired, then Company A would likely conclude this was a business acquisition and account for it under ASC 805.

This ASU is effective for private entities for periods beginning after December 15, 2018, but early adoption is permitted.

Please reach out to us if you have any questions regarding the new standard or other acquisition account issues.

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